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New Indonesian currency bill lacks clarity, lawyers warn

14 Jun 2011

Lawyers think that a new law concerning the rupiah lacks clarity. The new rules potentially mean that any trade conducted in US dollars onshore could be in breach of the law and could leave the party of the deal out of pocket.

A new currency bill passed by the Indonesian parliament lacks clarity, which could have important consequences for onshore businesses dealing in US dollars, lawyers at O’Melveny & Myers have warned.

The Currency Law, which was passed by parliament on May 31, formalises the role of the national currency—Indonesian rupiah—as legal tender for monetary obligations in the country.

Specifically, the law requires the use of the rupiah for settlement of payment obligations in Indonesia.

Lawyers Joel Hogarth and Ratih Nawangsari note that a specific article requires the use of the local currency for all transactions for purposes of payment, settlement of other monetary obligations, and other monetary transactions conducted within the country.

The new law exempts some financial transactions from being subject to this local currency stipulation, including certain transactions relating to the state budget, receipt or extension of offshore grants, international commercial transactions, foreign currency deposits in banks, or international financing transactions.

However the new law does not seem to explicitly allow Indonesian counterparties from entering into onshore contracts with pricing in any other currency. As things stand that means such transactions risk becoming illegal.

“While the language appears comprehensive, we do not believe the [law] is intended to prevent [this],” wrote the two in a note published June 13. “However, the Indonesian rupiah is legal tender for the settlement of such obligations, and we would recommend that onshore contracts include a provision or mechanism for fixing the exchange rate in the event of settlement in rupiah.”

The potency of the law, which kicks into effect on June 30, is wide reaching. For example a bank offering a loan denominated in US dollars to an onshore company might be in breach of the terms of the new law.

“Implementing regulations for the Currency Law are expected to be issued within one year of the enactment date, which may provide further clarification on the practical implementations of the law,” Hogarth and Nawangsari said.

While such clarification is likely to resolve such concerns, it is possible that institutions will opt to be cautious, and veer away from using non-rupiah denominated transactions in the coming months for fear of inadvertently breaching the new law.

14 Jun 2011